Asia down, RoW up

Sat, 20 Nov RoundUp

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Stock markets across the world saw a mixed week with major Asian countries ending the week on a poor note. Leading the pack of losers was China (down 3%), followed by India (down 3%) and Hong Kong (down 2.5%). Losses in China were led by oil stocks as concerns over decreasing demand due to the possible measures that will be taken to lower inflation. On the other hand, Japan was the top gainer this week, with a gain of 3%. These gains were led by the nation’s auto pack whose earnings prospects seem to have improved due to the weakening Yen.

Moving on, the European stocks were in favour this week with Germany and France ending with gains of about 1 to 2%. US ended the week on a marginally positive note.

Source: Yahoo Finance

Moving on to the performance of sectoral indices in India - all the indices were down this week with realty stocks leading the pack. The BSE-Realty Index ended lower by 9%. The BSE-Consumer Durables and BSE-Oil & Gas indices followed suit with weekly losses of 7% and 5% respectively. Amongst the top performers were stocks from the healthcare, FMCG and auto spaces. While the BSE-Healthcare Index was marginally down this week, the BSE-FMCG and BSE-Auto indices were down by about 2% each.

Midcaps and smallcaps were dragged along with the overall pessimism with the BSE-Smallcap and BSE-Midcap indices ending lower by about 6% and 4% respectively this week.

Source: BSE

Moving on to key corporate developments during the week - the telecom pack witnessed a mixed week. Stocks of Idea Cellular and Bharti Airtel were amongst the top gainers (amongst stocks forming part of the BSE ‘A’ Group) this week. Investors seemed to have favored these companies on the back of ongoing scam surrounding the grant of 2G spectrum, which has pulled down a number of entities in the telecom sector. The latest to be indicted is Reliance Communication (RCOM). As per its report, Comptroller and Auditor General (CAG) has raised doubts on the grant of licenses to RCOM. As per CAG the 85 licenses granted to the company were illegal. It has also raised the question of RCOM's ownership interest in Swan Telecom. RCOM maintains that it had sold its stake in Swan before the spectrum was granted to the latter. However, the CAG's report states that the stake sale may have happened after the LOI (letter of intent) was given to Swan. RCOM has released a media statement denying these charges.

Apart from this development, Bharti’s stock was in the news this week as it crossed the 200 m subscribers mark across geographies. In addition, the company also unveiled a new logo to the public to reflect its new global identity. It was reported that the company is scheduled to roll out its 3G services by the end of this year. This service will be launched in the 13 circles where it won the spectrum in the auction held earlier this year. Now, the big question is whether the company will be able to make money on this service. The company plans to keep the service affordable and it will be priced in such as way to balance the investments that made in acquiring spectrum and building the infrastructure.

Investors would do well to recollect that earlier this year, the company’s CEO (India and South Asia), Mr. Sanjay Kapoor stated that he expects 3G services to be priced higher on account of the high bid prices. The company plans to offer competitive tariffs in an innovative package. The company needs these services to help improve its ARPU (average revenue per user) levels. The company saw an almost 20% decline in ARPUs YoY in 2QFY11. This figure fell by Rs 50 from Rs 252 per month in September 2009 (2QFY10) to Rs 202 in September 2010 (2QFY11). The stock closed positive today.

Moving on from news from the telecom space to the auto space - auto major Tata Motors, reported that the Tata Motors Group as a whole registered robust sales numbers for the month of October. As per the company reports, the global sales of the group, comprising of Tata, Tata Daewoo and Jaguar and Land Rover (JLR), grew by 18% YoY in the month of October 2010. Cumulative sales for the fiscal are higher by a strong 44% over the same period last year. Coming back to growth for the month, while CVs grew by 20% YoY, passenger vehicles registered a growth of 17% YoY. JLR continued to impress, notching up combined sales growth of 12% YoY. While this is indeed a good start to the December quarter, we believe hardening prices of raw materials does pose a threat to the profitability, especially for the company’s standalone business.

A leading business daily reported that auto major, Mahindra & Mahindra (M&M) has plans to launch seven new products in the passenger vehicle segment over the next year and a half. Considering the strong volumes that are being witnessed by the auto sector, this is a good move by the company as it would allow it to cash in on the same. The list of new launches includes a new premium SUV from its own stable and two from the recently acquired Korean company Ssangyong. In addition, plans to launch new versions of the mid-sized passenger vehicle, Logan, are also on the cards. While this may be a good move, it must be noted that M&M is not the only company with this strategy in mind. Competition is expected to intensify, even in the SUV space where M&M is still the dominant player.

The stock of Axis Bank was in the news this week on the back of the bank signing a deal to buy a stake in the broking and investment banking arm of Enam Securities. A leading daily had reported that Axis Bank is set to initially acquire 49% stake in Enam for Rs 21 bn. Through the merger, Enam will become a 100% subsidiary of Axis Bank. The bank had earlier revamped its capital market division by dividing it into two major departments including investment banking and loan syndication. The deal will help the bank in expanding its footprint in the investment banking business.

Movers and shakers during the week

Company	12-Nov-10	19-Nov-10	Change	52-wk High/Low
Top gainers during the week (BSE-A Group)
Idea Cellular	68	74	8.7%	80 / 48
Educomp solutions	558	606	8.6%	876 / 450
Hero Honda	1,801	1,946	8.0%	2,094 / 1,525
Cadila Healthcare	745	785	5.3%	809 / 382
Bharti Airtel	314	329	4.7%	377 / 257
Top losers during the week (BSE-A Group)
Hindustan Copper	441	335	-24.1%	657 / 253
Unitech	86	68	-21.1%	98 / 67
Balrampur Chini	95	79	-17.0%	148 / 67
Videocon Industries	260	216	-16.8%	295 / 188
Indiabulls Financial Services	222	187	-15.8%	241 / 95

Source: Equitymaster
Inflation may not be a major worry yet for the developed world but is certainly causing problems for the emerging markets. China gave another proof of the same recently when its inflation reached levels not seen in two years. The situation is not very different for some of the other nations as well. Thus, it looks like further tightening measures could take place sooner than expected. Not a very good prospect for stocks as profitability that was already under pressure on account of high inflation would further be affected as a fallout of the tightening measure.

India of course is dealing with its own inflation back home. Inflation in India slowed to the lowest level in nine months in October 2010. The benchmark wholesale-price index (WPI) rose 8.58% from a year earlier after an 8.62% increase in September. As per the Finance Minister, the cause of inflation is due to a combined effect of demand push as well as due to pressures on the supply front. While the RBI's recent hike in interest rates has helped to reign in the inflation to some extent, the pressures from the supply side continue to keep it at higher levels. The pressure was most felt in food items. Food inflation was at a high level of 14.13%. However it did see some moderation from 15.71% in September. Inflation on manufactured items stood at 4.75%. However, this was a slight increase from the 4.59% inflation on manufactured items seen in September.

With the slowdown in inflation, the RBI may relax its stance on further monetary tightening. The central bank already raised rates 6 times so far this year. Lending and borrowing rates were raised by 1.5% and 2% respectively this year. The Prime Minister’s Economic Advisory Council hopes that inflation will come down to 6.5% by the end of this calendar year (December). It hopes that the rate slows down further to 5.5% by March, 2011.